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4 Top Sector ETFs & Stocks to Outperform in Q1 Earnings

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The Q1 earnings season is underway with major banks set to report this week. Earnings for the S&P 500 index are expected to grow 6.5% from the same period last year on 6.3% higher revenues, as per the latest Earnings Outlook. Earnings growth is lower but revenue growth is higher than the Q4 growth of 7.4% and 4.7%, respectively (read: Forget Earnings: Play Revenue Growth with 4 ETFs).

While earnings estimates for Q1 have declined from 10.4% at the end of December, the magnitude of negative revision is lower relative to recent quarters. Nine of the 16 Zacks sectors are likely to record an earnings increase with technology and basic materials leading the way with double-digit growth. Earnings growth for industrials and financials are expected in mid-single digits of 6% and 5.4%, respectively. Energy will likely be a big contributor to growth this quarter, with the sector alone accounting for 4 percentage points of the total 6.5% earnings growth.

Investors should note that Q1 earnings growth is expected to actually exceed the past quarter’s record. However, the absolute dollar level of Q1 earnings will remain shy of the preceding period’s all-time quarterly record by a big margin.

Given this, we have highlighted one ETF and one stock from each of these sectors that could make great plays. Each of these ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy) or #2 (Buy). For the stocks, we have added the extra flavor of a positive Earnings ESP, as stocks with this combination have a 70% chance of beating estimates when their earnings are released in the coming weeks, and a VGM Style Score of B or better.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Technology

First Trust NASDAQ-100-Technology Sector Index Fund QTEC: This ETF tracks the NASDAQ-100 Technology Sector Index, holding 35 stocks in its basket with almost equal allocation. From an industry look, semiconductors dominates the list with 41% share while software and Internet take decent allocations of respectively 26.7% and 17.2% in the portfolio. QTEC is a large cap centric fund with AUM of $1.9 billion and average daily volume of around 425,000 shares. It charges 60 bps in annual fees and has a Zacks ETF Rank of 2 with a High risk outlook (read: 5 Hottest Tech ETFs of 2017).

Avid Technology Inc. AVID: This Zacks Rank #2 company with a VGM Style Score of A develops, markets, sells, and supports a wide range of software and systems for creating and manipulating digital media content. It has an Earnings ESP of +160.00% and delivered positive earnings surprises in three of the last four quarters, with an average beat of 166.96%. The stock saw positive earnings estimate revisions from a loss of three cents to earnings of five cents over the past three months for the first quarter. The company has a solid Zacks Industry Rank in the top 43% and is slated to release earnings results on May 3.

Basic Materials

iShares U.S. Basic Materials ETF IYM: This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 52 stocks in its basket. Out of these, Dow Chemical DOW and DuPont DD occupy the top two positions in the basket, with over 11% of assets each. The product is heavily skewed toward the chemical segment, as it makes up for more than two-thirds of the portfolio while industrial gases, steel, and metals & mining receive a minor allocation each. The fund has AUM of $933.4 million and charges 44 bps in fees and expenses. Volume is good as it exchanges around 263,000 shares in hand a day. IYM has a Zacks ETF Rank of 1 or High risk outlook.

The Chemours Company CC: This Zacks Rank #1 company with a VGM Style Score of A provides performance chemicals in North America, the Asia Pacific, Europe, the Middle East, Africa, and Latin America. The stock saw solid earnings estimate revision of three cents for the first quarter over the past 30 days, with an expected whopping growth rate of 708.3%. It has an Earnings ESP of +4.08% and delivered positive earnings surprises in three of the last four quarters, with an average beat of 151.56%. Chemours Company is scheduled to report results on May 1 and has a solid Zacks Industry Rank in the top 20% (read: Best ETFs & Stocks from Top Sectors of Q1).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Industrials

Industrial Select Sector SPDR XLI: This is the most popular ETF in the space with AUM of $10.7 billion and an average daily volume of nearly 11 million shares. The fund follows the Industrial Select Sector Index, holding 69 stocks in its basket. General Electric GE takes the top spot at 9.1% while the other firms account for no more than 5.43% of XLI. About one-fourth of the asset is allocated to aerospace & defense while industrial conglomerates, and machinery make up for a double-digit share each. This ETF charges 14 bps in fees per year and has a Zacks ETF Rank of 2 with a Medium risk outlook (read: Trump's Defense Spending Plans Make these ETFs Buys Again).

Caterpillar Inc. CAT: This Zacks Rank #2 company with a VGM Style Score of B is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbine. It has an Earnings ESP of +17.86% and delivered positive earnings surprises in the last four quarters, with an average beat of 13.64%. The Zacks Consensus Estimate for the first quarter of 2017 is pegged at 56 cents, up a couple of cents over the past two months. The company is slated to release its earnings results on April 25 and possesses a strong Zacks Industry Rank in the top 10%.

Financial

Financial Select Sector SPDR Fund XLF: This is the most popular financial ETF in the space with an AUM of $22.9 billion and an average daily volume of about 74.9 million shares. It tracks the Financial Select Sector Index, holding 67 stocks in its basket. It is concentrated on the top four firms that collectively account for 38.2% share while the other firms hold no more than 5.7% of the assets each. In terms of industrial exposure, banks take the top spot at 44.6% while capital markets, insurance, and diversified financial services make up for double-digit exposure each. The fund charges 14 bps in annual fees and has a Zacks ETF Rank of 1 with a Medium risk outlook (read: Don't Let Trump ETFs & Stocks Fool You).

Reinsurance Group of America Inc. (RGA - Free Report) : This Zacks Rank #2 company with a VGM Style Score of A is primarily engaged in life reinsurance and international life and disability insurance on a direct and reinsurance basis. It saw solid earnings estimate revisions of five cents for the first quarter over the past three months, and has a substantial expected growth rate of 14.19%. It has an Earnings ESP of +1.42% and delivered positive earnings surprises in three of the last four quarters, with an average beat of 6.40%. Reinsurance Group is scheduled to report its earnings results on April 27 and has a robust Zacks Industry Rank in the top 18%.

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